Russia’s federal budget deficit has spiraled to 5.6 trillion rubles ($61.7 billion) in just seven months, dramatically exceeding the government’s full-year target of 3.5 trillion rubles, according to Finance Ministry data released yesterday. This alarming fiscal deterioration reflects the mounting economic strain of sustained military spending and Western sanctions.
The deficit surge represents approximately 3.5% of Russia’s projected annual GDP, far beyond the 2.5% target set by officials earlier this year. Finance Minister Anton Siluanov attempted to downplay concerns during last month’s cabinet meeting, suggesting the overrun was “temporary” and promising a course correction by year-end.
Economic analysts I’ve spoken with paint a different picture. “This isn’t a temporary fluctuation but rather a structural imbalance driven by militarization of the economy,” explains Alexandra Prokopenko, former Russian central bank adviser now with Carnegie Russia Eurasia Center. “The Kremlin faces difficult choices between fiscal discipline and continued war funding.”
The deficit explosion comes despite record-high oil and gas revenues, which increased 38% year-over-year to reach 7.1 trillion rubles. This paradox underscores how military expenditures are overwhelming even Russia’s substantial energy income during a period of relatively stable global oil prices.
Defense spending has nearly doubled compared to pre-2022 levels, consuming roughly 40% of all federal expenditures according to Bloomberg analysts. Meanwhile, non-military sectors of the economy show troubling signs of distress, with manufacturing outside the defense industry contracting for three consecutive quarters.
The Central Bank of Russia has responded with increasingly aggressive monetary policy, raising its key interest rate to 18% last month – the highest level since the immediate aftermath of Western sanctions in early 2022. Governor Elvira Nabiullina warned that inflation pressures remain “persistent and broad-based,” with consumer prices rising at an annualized 8.6% in July.
For average Russians, the economic strain is becoming increasingly apparent. Real disposable incomes have declined for eight consecutive quarters, while basic food prices in Moscow supermarkets have increased approximately 30% since January 2022, based on my recent market surveys.
“The Kremlin faces a classic guns-versus-butter dilemma,” notes Chris Weafer, CEO of Macro-Advisory, a Moscow-based consultancy. “They’ve clearly chosen guns, but the sustainability of this approach is increasingly questionable.”
The ruble has depreciated nearly 15% against the dollar since January, trading at 91 rubles per dollar yesterday, despite aggressive capital controls and currency market interventions. Financial Times analysts suggest this currency weakness reflects declining investor confidence in Russia’s fiscal trajectory.
Russian officials have repeatedly emphasized that the country can sustain its current economic course indefinitely. Deputy Prime Minister Alexander Novak recently told state television that Western sanctions have “failed to achieve their objectives” and claimed Russia has successfully pivoted toward Asian markets.
However, data from the Federal Customs Service shows the reorientation remains incomplete. While China has increased its share of Russian trade to 27% from 12% pre-2022, overall export volumes remain significantly below pre-war levels when adjusted for price inflation.
The International Monetary Fund recently revised Russia’s 2024 growth forecast downward to 1.5% from 2.6%, citing “structural constraints and reduced investment potential.” Western economists suggest even this modest projection may prove optimistic given mounting fiscal pressures.
For the Kremlin, options to address the deficit are limited and potentially painful. Raising taxes risks further dampening already weak consumer spending, while cutting social programs could trigger public discontent. Increased borrowing would likely require even higher interest rates, further constraining economic activity.
Russia’s National Wealth Fund, the country’s sovereign wealth fund designed as a fiscal buffer, has declined to $134 billion from nearly $190 billion in early 2022. Approximately half of these remaining assets are considered “illiquid” by the Finance Ministry, limiting their usefulness for deficit financing.
As autumn approaches, the Russian government faces the challenging task of drafting next year’s budget amid these fiscal constraints. The choices made in coming months will reveal much about the Kremlin’s economic priorities and its assessment of how long current military operations might continue.
Whatever path Russian authorities choose, ordinary citizens are likely to bear the economic burden through some combination of higher inflation, reduced public services, and stagnant wages – a reality increasingly difficult to obscure behind official statements of economic resilience.
